RBS to settle crisis-era mortgage bond claims with £4.2b payout

Royal Bank of Scotland is to pay £4.2bn to settle claims it mis-sold billions of dollars-worth of toxic mortgage-backed bonds to Fannie Mae and Freddie Mac in the run-up to the financial crisis.

In a long-awaited deal that helps RBS move on from its troubled past, the lender agreed to pay $5.5bn (£4.2bn) to the Federal Housing Finance Agency (FHFA), which took control of Fannie Mae and Freddie Mac in 2008, over the $32bn of residential mortgage-backed securities (RMBS) the bank sold to the pair between 2005 and 2007.

Ross McEwan, the loss-making lender’s chief executive, said settling the lawsuit was “a stark reminder of what happened to RBS in its past when it put its global ambitions ahead of the interests of its customers”.

He added: “This bank and British taxpayers have paid a very high price for these poor decisions.”

Before the 2008 banking crisis, RBS was one of the largest lenders in the world with a substantial investment banking business.

As part of its expansion, it became the biggest non-American issuer into the US market of RMBS. These were complex securities backed by cash flows from mortgages that Fannie Mae and Freddie Mac bought and which contributed to the failure of the two American mortgage giants when the housing market collapsed.

RBS itself was forced into a near-£46bn government bailout at the peak of the crisis and is still 71pc-owned by the state. Mr McEwan, who took the helm almost four years ago, closed down the subsidiary that sold RMBS in 2015.

Shares in RBS rose as much 3.5pc following the disclosure of the settlement, reflecting investor relief the bank had put one of its so-called legacy issues behind it, before closing down 2pc at 251.5p.

Some £581m will be reimbursed to RBS because of indemnification agreements it has agreed with other parties, meaning the overall cost of the FHFA settlement to the bank will fall to £3.65bn.

“It’s never a great experience for a CEO to be effectively writing such a large cheque,” Mr McEwan said.

RBS, which has been locked in talks with the FHFA for months, had previously set aside £3.6bn to cover a settlement with the agency.

Ewen Stevenson, RBS’s finance chief, conceded the final agreement was “marginally higher” than had been expected and, as a result, it will take a further £151m charge in its second quarter results next month.

RBS is one of 17 firms that have now resolved claims brought by FHFA over RMBS and its settlement is the second biggest secured by the agency behind the $9.3bn extracted from Bank of America three years ago. The FHFA filed 18 lawsuits over mortgage bonds in 2011.

Resolving the litigation puts RBS a step closer to restarting dividend payments that were scrapped after its bailout, although it still has other hurdles to overcome.

It must settle claims from the US Department of Justice (DoJ) that it mis-sold RMBS but, because of the change-over to the Trump administration, is no closer to resolving that issue, RBS said today.

It has set aside about £3bn for its outstanding RMBS-related litigation, the bulk of which relates to an eventual DoJ deal, although Mr Stevenson said RBS had been “very open” that it could make “material” additional provisions to cover the final settlement with the US.

Before paying dividends, the bank must also agree with the EU an alternative plan to a troublesome sale of its Williams & Glyn business, which Brussels demanded to meet state aid rules following its bailout. It also has to generate its first profit since the crisis, which it expects next year, and pass a Bank of England stress test.

Still, analysts at Bernstein said the FHFA settlement “removes a significant obstacle that was previously blocking the resumption of dividends”.

RBS slumped to a £7bn loss in 2016, its ninth consecutive year in the red.